Wednesday, 27 July 2011

Everything's Affordable!

This week, I had an interesting discussion with several members of an Australian property investment forum.

Foolishly, I made the newbie's mistake of mentioning that Australian house prices had become less affordable over the past couple of decades.

What a faux pas!

Immediately, I was pounced upon by the more senior members of the forum, keen to set me right and correct my silly mistake.

Courtesy of those wise property investors, I thought I'd share their thoughts on where I was going wrong.

Let's begin with my simple statement that preceded the storm.

Different Here: "The house price to single income ratio used to be 2-3x. Now it's 6-7x. People on single incomes are priced out of homes they could previously afford."

-- "Really? What if that income is $180,000 or more?"-- "Sure you can buy a home for a 2-3x income ratio. Stop whinging" -- "Buying your first home is never easy. It wasn't easy 20 years ago, and it is not easy now."-- "Yet there are still those on single incomes doing it. Funny that!" -- "Instead of waisting time rubbishing property on a property forum. Sit back, save and wait for things to improve."-- "You can continue renting my properties while you wait for the crash. Even if it crashed I wouldn't sell it to you"-- "This kind of comment/allegation is false without qualification."-- "Where do you want to buy? What is unaffordable? Good suburbs 20 years ago were 'unaffordable' for most people."-- "I can show you where to buy affordable housing, but you don't want that. What you want to do is rant and rave about how hard it is nowadays. Well you know what? Bleating about it here, to a bunch of investors is not going to change anything."

Most of those comments were accompanied by much 'eye rolling', if I'm reading those emoticons correctly. You could just feel the collective sigh among the property investors -- 'here's another nutter who thinks house prices are too high, get a load of the crazy guy'.

And then someone (who had been a member of the forum since 2005) kindly posted this image for me.

-- "Different Here, are you a student by any chance? We see a number of kids here come and go; mostly in shock at their own seemingly-distant ownership prospects, and the discussion always takes the same route: disbelief, incomprehension, emerging comprehension, half-baked hope, deepening personal reflection, explicit commitment to study harder and get into a career, too much time wasted on SS talking about piffle instead of studying, bad grades, silence."

Let's set the record straight. I'm not a student. I'm a middle aged father of two. I'm not renting. I already own my home, fully paid off. I'm not 'rubbishing' property. I wasn't 'bleating', in fact I only mentioned the affordability decline in passing, I wasn't even making a big deal about it.

What are these property investors so scared of, that they must attack a new member for mentioning the fact that Australian homes are less affordable then they used to be? A new member is labelled a troll for daring to mention Australia's affordability crisis?

Ironically, just today the Sydney Morning Herald published this article.

AUSTRALIAN house prices have moved from being affordable to severely unaffordable in the past 10 years - and Sydney is still the least affordable capital city, a new study shows.

The study, by the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra, and AMP, says it will take at least another 10 years of flat house prices, coupled with income growth, for houses to regain an affordable status.

The study found median house prices in Australia grew 147 per cent between 2001 and 2011 to $417,000, while median after-tax incomes only increased 50 per cent to $57,000.

This pushed the price-to-income ratio - the number of years' worth of income needed to buy a typical dwelling outright - from an affordable 4.7 to a severely unaffordable 7.3.

In the last decade alone, Australia's house price to income ratio has escalated from 4.7x to 7.3x. That's up from approximately 3x two decades ago. House prices are almost twice as unaffordable as they used to be despite the property investor claims to the contrary.

You see, according to the property investors, nothing can ever be considered 'unaffordable' because there's always some rich family who can afford it. Nothing can ever be unaffordable, because if you make enough sacrifices anyone can buy a small run down unit. So what's the problem?

The problem is two decades ago, single income families could easily afford a certain standard of dwelling. Now it requires dual incomes to afford that same standard of dwelling. Houses are less affordable then they used to be, it really is that simple.

Of course, if you make enough sacrifices, scrimp and save, and take on a massive soul destroying mortgage, then anyone can 'afford' to buy. But does that make it affordable? I don't think so. Housing is not affordable if we're forced to trade housing for quality of life. If we're forced to take no holidays, never treat ourselves to any luxury, delay having children, put our children in daycare all week, just so both parents can work 80 hours a week to 'get on the housing ladder', then housing is categorically not affordable.

Yes, property investors, 'good suburbs' were always more expensive, cheap housing can always be found in the less desirable suburbs, people on single incomes are always able to afford something if they make enough sacrifices. But this doesn't change the fact that affordability has declined.

It used to be hard for young families to afford a home, but now it's twice as hard.

118 comments:

I assume you went to Somersoft? They are scared and angry because you are correct. They're probably also annoyed because some of them have found it difficult to sell and realise and gains in recent times. The groupthink is unshakeable, and there's little sense in wasting your time there.

These people are in la la land and denial as their world tumbles down around them - there is a big (very big) difference between single income and total household income measure when that is factored into affordability. I know quite a few people that earn $180,000 but they are not the norm, far from it. Big Bubble...about to deflate along the some lines as all the other bubbles around the world.

Tony, good to see you have seen through the deception being offered up by MSM.Speculators are angry that they are being called out.Thanks to the internet it is easy enough to find out all sides of an argument.Govt wants housing to be an industry, with home ownership only for the select few. It stands side by side with banks and RE lobby in its efforts to achieve this lowly aim.

http://en.wikipedia.org/wiki/FIRE_economy Capitalizing any economic surplus into debt service:"One criticism of FIRE economies is that:financial maneuvering and debt leverage play the role that military conquest did in times past. Its aim is still to control land, basic infrastructure and the economic surplus – and also to gain control of national savings, commercial banking and central bank policy. This financial conquest is achieved peacefully and even voluntarily rather than militarily.

In regards to the finance sector, it has been noted that the:. . business plan of bank marketing departments is to capitalize any economic surplus into debt service. Loan officers see any net flow of income as potentially available to be captured as interest payments. Their dream of growth and financial success is to see the entire surplus capitalized into debt service to carry loans."

Great post - I have been trying to persuade a friend (a die-hard property investor) of the unaffordability of the property market for years with no success. It doesn't matter how much data or analysis I send him, there's always some (illogical) reason why property prices will keep going up. It's like trying to convince someone to change religion.

Lately, though, the idea that the property market is overvalued is becoming more accepted in the mainstream - no doubt helped by the fact that prices ARE actually falling now - so the tide is turning. The investors, of course, will be the last group to come around as they have the most to lose and therefore have the greatest denial.

As for people on over $180,000 - we are postponing upgrading from our almost-paid-off house because prices are just ridiculous, even though we could 'afford' them.

Well, I'm a single-income family breadwinner earning $350,000 with a $500,000 deposit ready to go but I consider housing to be so overpriced at the moment that I simply refuse to buy in the current market. I'm quite happy renting for now. I refuse to fund some baby-boomer's retirement.

Whoever said property is the new religion is right! Trying to convince the true believers of the implausibility of 'its different here' is akin to trying to convert a creationist to the Darwin's evolutionary theory. It ain't gonna happen.

Fortunately, history is on our side. There has never been a bubble this huge in housing that has not come to tears. Anywhere, at any time. Australia has hit peak debt. People aint gonna take it any more, and this house of cards is coming down.

Why are you STILL wasting your time with Somersoft? It's full of agents, brokers, buyers agents and people heavily invested in the strength of the property industry. Thus, the majority are blinkered and won't be open to differences in opinions. You're better off contributing to a quality site like Macrobusiness.

Thanks for the comments everyone. I'm glad there are some rational people around here, it's unfortunate there are not so many of you to be found on that property investment forum! I feel like it's me against the world there!

I appreciate the encouragement from your comments here and I'm hoping to post another blog a few days.

OMG! What a one sided simplistic view of the world. How about you get an education before you start waging wars concerning the property market. There is so very much that you don't understand that I'm truely embarrassed for you.

I had to remove some abusive comments. No problem if people want to critique the blog, but to the anonymous contributor who has nothing to contribute other than calling me an idiot, please try to put together some sort of logical or constructive response instead. Simply calling me names with no further comment on the blog content, just makes you seem angry and desperate. If my writing upsets you that much, perhaps you need to take a hard look at your investments and debt levels, and try to reduce your blood pressure a little bit.

I think they are just sore and they do not want to admit the fact that houses are increasing in rates for the past couple of years due to the increase in the Australian dollar. This is the reason why our company invest in properties in the first place(no offence).

Funny, I would have reckoned waiting for the crash myself but I was too busy reconciling with my property conveyancing service to get a hold of my property. Had I given it perhaps a few months, I would be lobbying on those precious thousands dollars saved. Sigh.

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